Delta Air Lines CEO Ed Bastian is the second U.S. airline CEO in a week to tell Skift the China market is performing fine for passenger demand. Will it last?
Delta Air Lines CEO Ed Bastian said on Saturday that the carrier’s revenues between the United States and China are up 25 percent so far in 2019, year-over-year, despite heightened trade tensions and data showing the number of Chinese visitors dropped last year for the first time since 2003.
“With respect to U.S. [and] China, we are not seeing a significant impact brought on by some of the trade and tariff concerns,” Bastian said during a briefing at the IATA Annual General Meeting in Seoul, a conference of airline executives. “It is our two largest markets in the world, the U.S. and China, and I think there continues to be strong commerce between our two markets.”
Bastian is the second U.S. airline CEO to share similar sentiments this week. On May 27, at the Skift Forum Asia in Singapore, United Airlines President Scott Kirby also downplayed the effect of the trade war on airlines, saying the carrier has not noticed decreased demand to and from China. This despite the National Travel and Tourism Office reporting in May the number of tourists from China fell 5.7 percent, year-over-year, in 2018.
While tourists may fill many seats on transpacific flights, airlines earn their biggest revenues from business customers, who may sit in premium cabins and pay higher prices. And apparently, they’re still traveling.
“There’s a strong interest in travel and commerce,” Bastian said.
Long-Term China Plan
Long-term, Delta is bullish on China. Today it funnels much of its connecting traffic to Asia through Korean Air Lines’ hub outside Seoul. The two carriers have antitrust immunity, and they recently instituted a joint venture in which they share revenue on many flights. It was one of Bastian’s first priorities after taking over from former CEO Richard Anderson
The Korean Air relationship is expected to grow and strengthen over time, with Delta perhaps adding more flights from the United States to Seoul, Bastian said. But Delta is also hoping to move closer to China Eastern Airlines. In 2015, Delta spent about $450 million for a 3.55 percent stake in the airline. He said Delta is “excited about the possibility of hopefully” moving into Beijing’s new airport next year, which could improve connecting opportunities.
However because the United States and China do not have a liberal air services agreement, U.S. and Chinese carriers cannot apply for antitrust immunity. Until or unless they do, Delta cannot be as tight with China Eastern as it is with Korean.
More Changes in Asia
Delta’s Asian network is in a considerable state of change, and not just in Korea and China.
After its 2008 merger with Northwest Airlines, Delta inherited a hub at Tokyo Narita International Airport. It was a relic from a time when airplanes could not fly so far, and U.S. carriers didn’t have as many Asian partners. At one point customers could fly Northwest to Tokyo and then transfer to another Northwest flight to reach about every major city in Asia.
The hub was still robust at the time of the merger, but over the past decade Delta has rolled it back, with Shanghai, Guam, Taipei, and Saipan going away within the past few years. Flights to Manila and Singapore remain.
Some analysts expect Delta will leave Narita airport within a couple of years, eliminating Singapore and Manila flights and moving its U.S. operation to Tokyo Haneda International Airport, which is preferred by business travelers because it’s closer to downtown. It has been difficult for foreign airlines to move flights to Haneda because the Japanese government limits access. But in advance of the 2020 Olympics, the Japanese government is giving U.S. airlines more opportunities.
The U.S. Department of Transportation is handling the process of doling out 12 more round-trip authorities to U.S. airlines. In a preliminary decision the U.S. government recently said Delta should receive five of them, allowing it to move flights from Seattle, Detroit, Atlanta, Portland, and Honolulu. Delta already flies from Los Angeles and Minneapolis to Haneda.
“Delta is the big winner here, and it received enough slots that it should be able to close its old Narita hub entirely,” Brett Snyder, an airline analyst and blogger, wrote in a blog post.
But will it? It seems likely, but Bastian said it’s too early to announce, because the Department of Transportation’s decision is not final.
“It is still in draft form so until we know the final outcome of the case, we can’t really comment on our plans into the future,” he said.
Delta’s top two competitors — American Airlines and United — will continue to split flights between Haneda and Narita. Unlike Delta, both have antitrust immunity with a major Japanese airline. American is close with Japan Airlines, while United’s partner is ANA.
Cargo is an Issue
While Bastian said U.S-Asia demand remains strong, he acknowledged the global cargo business is slowing. And in this case, a trade war may be to blame.
“Cargo is the one part of our business that has had some weakness,” Bastian said. “Clearly it has been impacted by some of the trade concerns.”
In April IATA found global freight volumes fell about 4.7 precent, year-over-year. Meanwhile, IATA said, freight capacity is still growing, up about 2.6 percent compared to 2018.
“The U.S.-China trade dispute has continued to weigh upon the world trade outcomes and outlook, evidenced by the weakness in recent activity out of important air freight hubs such as Hong Kong and Shanghai,” IATA said in the report.
Major global airlines like Delta often carry cargo in the bellies of widebody airplanes. While airline executives often say cargo itself can’t make a losing route a winner, it can help turn marginal routes into slight money makers.
Still Bastian said the dip in cargo isn’t so material to Delta.
“Cargo for us is not a significant contributor to our bottom line,” Bastian said. “It is important, but it is roughly $1 billion of revenue out of about $50 billion of total revenue at Delta. It is not something that is going to change our strategy for the future.”
Editor’s note: For consumer analysis on the behaviors and preferences of Chinese travelers, read Skift Research report Best Practices for Attracting Chinese Outbound Tourists.
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Photo credit: Delta Air Lines CEO Ed Bastian remains bullish on China despite trade war rhetoric. John Bazemore / Associated Press